Tag Archives: CDU.LS

Conduril reports results for 2017

Last week Conduril released their annual report for 2017 (Portuguese version only, the English translation follows later). The company is still struggling a bit, but I think there are good reasons to be optimistic. Compared to 2016 revenue was basically unchanged, while EBITDA increased from €29.1 million to €34.5 million and net income increased with 65% from €4.2 million to €7.0 million. Thanks to the higher profitability Conduril has announced to increase its dividend from €0.50/share to €1.50/share, a payout ratio of 39%.

This is of course all pretty decent, but I think the most important announcement in the annual report is that the Angolan bonds, worth €83 million, will finally be turned into cash. Last year I was already waiting for that, and it’s not yet reflected in the financials, but supposedly they were settled on March 21, 2018. Given that the company has currently a market cap of €77.4 million that’s a pretty big event. That means that they can repay the fast majority of their outstanding debt (€116.7 million in total) and the reduced interest expense should have a meaningful impact on their profitability going forward. Even after the settlement of the €83 million in bonds Conduril will continue to have a large exposure to Angola. The non-current “other financial assets” line item hides €55.5 million in debt securities that were previously classified as “assets held for trading”.

Given that the removal of Conduril’s debt could almost double its profitability I think the stock remains extraordinarily cheap. Right now it’s trading at just a 11x P/E ratio, and if we include the “other financial assets” in the NCAV figure it’s trading at a 50% discount to that number as well.

Disclosure

Long Conduril

Conduril reports 2016 results

One of the annual reports I anticipated most was the Conduril one for 2016, and that it finally arrived yesterday. The results are a bit of a mixed story, but offer some basis to be cautiously optimistic. Last year the company saw revenues drop with more than 25%, but remained profitable with €29.1M in EBITDA (down 18.0%) and €4.2M in net income (down 31.1%). Next year is probably going to be better though since the backlog is up to €385 million from €340 million last year. As long as Conduril remains profitable I’m happy, since at this point in time the most important part of the investment thesis is the large discount of 57% to net current asset value (I’m including non-current financial assets in this number as well).

On the balance side of the equation it’s nice to see that a net debt position of €24.6 million was turned in a net cash position of €36.9 million. This number nets the debt at Conduril with assets held for trading (Angolan government bonds) and other financial assets (guaranteed by the Portuguese state), so it’s not yet true cash. This is a bit disappointing since in the latest interim report the €83 million receivable with a guarantee of the Portuguese state was already on the balance sheet, and I expected that it would have been settled for cash by now. Instead the promise that it will be settled soon is the same language as six months ago. Note 18.4:

As of December 31, 2016, this caption falls under the “Convention on the Exportation of Equipment and Services Portuguese Origin, for the Republic of Angola “that benefits from the Portuguese State Guarantee. It will be settled by a Financial institution in the national territory in the short term

This was translated by Google, so it might miss some meaning. While we apparently have to wait a bit longer to get cold hard cash, I’m happy that Conduril has shifted some of its credit exposure from Angola to Portugal during the year. Given the large discount between the current market cap, and its net current asset value I think Conduril remains a very attractive idea. Especially considering that it remains profitable in this challenging environment.

Portugal | Subconcessão do Baixo Alentejo

Disclosure

Author is long Conduril

Conduril reports 2015 results

Conduril released their annual report for 2015 yesterday. As usual the report is initially only available in Portuguese, but luckily Google Translate is pretty awesome. Unfortunately Conduril’s results for 2015 are not equally great. While revenue only dropped 6% from €208 million to €196 million net income dropped dramatically from €29.5 million to €6.2 million. The company doesn’t provide a real explanation for this. They spend a lot more this year on “External supplies and services”, but no idea why and whether or not is going to be an onetime issue or a permanent change. In addition the positive effect of currency movements was a lot smaller this year, although that was partly offset by a big reversal in the provision for doubtful accounts. If Conduril didn’t have that reversal reported earnings would have been close to zero.

Besides the poor – and unexplained – earnings I found the following noteworthy:

  • Conduril finally started to do some business again in Portugal. In 2015 23% of revenue originated from their homecountry compared to 7% in 2013 and 2014.
  • They loaned €20 million to two Portugese companies that they also own a minority stake in, bringing the total balance to €33.8 million. €20.3 million is outstanding to “SPER – Portuguese Society for Construction and Road Exploration, SA” while “Algarve coast routes, SA” has €13.5 million outstanding.
  • A huge part of their balance sheet continues to consist of Angolan government bonds, now worth €101.8 million. Unfortunately the credit rating of the country was recently downgraded from B+ to B because of the lower oil price, its main export product.
  • In the second half of 2015 the company finally managed to turn some receivables into cash, lowering the “cash conversion cycle” metric from 283 to 223 days.
  • Despite the difficult conditions the backlog is holding up reasonable well, dropping from €450 million at the start of the year to €340 at the end of 2015.
  • They announced a dividend of €0.50/share, just 25% of the €2/share that it paid last year.

While the 2015 results were not very good I think that the company continues to represent a great deal, although an increasingly risky one because of the large credit exposure to Angola. With the stock at €42 Conduril is trading at 66% of NCAV and that is ignoring the €33.8 million in loans to Portugese companies that are classified as non-current assets. If we would include those in the valuation NCAV/share would jump from €64 to €83/share.

The Algarve coast

Disclosure

Author is long Conduril

Annual results: Conduril, Ming Fai, Retail Holdings & Rella

The last week of March was a busy month with several of my portfolio companies releasing their results for 2014. My biggest position is Conduril, and they released their results for 2014 yesterday. As usual the annual report is at the moment only available in Portuguese, the translated English version should follow in a couple of weeks.

Conduril

Conduril’s performance for 2014 was satisfactory, but there are a couple of clouds in the sky. Their backlog dropped from €750 million at the end of 2013 to just €450 million at the end of 2014, one of the lowest levels in years. Generating free cash flow also proved a problem in 2014. This wasn’t exactly a surprise since the company announced in their interim report that the Angolan government settled a large outstanding receivable with certificates of public debt. But even when we ignore this item we see that working capital is growing while revenues have been shrinking the past years. The good news is that the company announced that it will pay a €2/share dividend this year and that it is still dirt cheap. It’s trading at a P/E ratio of just 4.2x and of P/B ratio of just 0.6x which is a small discount to NCAV.

An updated summary of their financial performance for the past six years is provided in the table below. A large part of the positive differential between other income and other expenses is caused by foreign exchange gains. Probably repeatable for 2015 given the decline of the euro this year, but of course not sustainable in the long-term:

Historical results Conduril (2014 AR update)

Ming Fai International Holdings

Ming Fai also reported results for 2014. My thesis for the company is based on the fact that the profitability of their core business is ‘hidden’ by two loss-making divisions, but since one of these divisions has been shut down mid-2014 I expected that reported results would soon improve. Reported net income did indeed jump by 67% in 2014 while the dividend was also increased by 29%. While this is, of course, good news there was also some bad news buried in the financials. The profitability of their crown jewel, the amenity segment, decreased while losses in the retail segment only got bigger:

Segment details Ming Fai (2014AR update)

Retail Holdings

Retail Holdings also reported their 2014 results yesterday. Results for 2014 weren’t particularly impressive, but the company continues to trade at a 40% discount to NAV, announced another $1/share dividend while the long-term strategy is still to monetize the value of its assets. It’s for sure taking a long time, but we get paid to wait and intrinsic value can grow in the meantime. The chairman of the company is pretty optimistic:

I remain optimistic about 2015 and later years. I anticipate a marked improvement in Sri Lanka’s performance, reflecting accelerating economic growth, helped by lower oil prices, an improving agriculture picture, an increase in government salaries, and an uptick in consumer confidence, as well as the launch of a major new financial services initiative. In Bangladesh, a lot will depend on political developments, but the Company’s performance should improve in any case, particularly in the second half of the year, as the Company’s new refrigerator factory begins production, and other improvements now under way impact results. Pakistan and Thailand’s performance should also improve as new initiatives impact results. I expect India to continue to grow strongly. Revenue and profits in 2015 and later years will also benefit from the rollout of the new Cambodian business and from the Company’s ongoing investment in new and renovated shops and in new products, brands and services.

The holding company currently consists of the following assets:

Retail Holdings NAV (2014AR update)

What I also found interesting was the following paragraph in the annual report:

During 2014, the Company returned to equity $49,000 of the 2009 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $13,000 was escheated. During 2013, the Company returned to equity $175,000 of the 2008 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $3,000 was escheated.

I’m not familiar with the relevant laws in the US. I’m wondering if shareholders that don’t claim their dividends lose the right to receive them after 5 years? And what will happen if the company eventually liquidates? It appears that approximately 5% of dividends go unclaimed, and if this eventually accrues to other shareholders it could be a nice bonus?

Rella Holding

Since Rella announced that they would sell their stake in Aller and liquidate it doesn’t really matter what the latest results are. Despite that fact, the annual report did contain a couple of interesting items. The company increased the estimated liquidation proceeds from 77DKK/share to 77.5DKK/share. What I also found noteworthy is that the company renewed their share repurchase authorization. I don’t know if they are going to use it, but it would allow Rella to bet on its own liquidation. Could generate a bit of value for remaining shareholders.

Disclosure

Long Conduril, Ming Fai and Retail Holdings. No position in Rella anymore.

Reduced my position in Conduril

I have been reducing my position in Conduril this month because I think the risk/reward is at the moment not as attractive as it was earlier this year. This despite the fact that the share price declined with more than 25% from a high of €88/share to the current €65/share. The main reason is the sharply declining oil price, and the possible effect that it will have on Angola. Conduril is generating roughly 50% of its revenues from Angola while the country relies on oil for approximately 80% of its tax revenues. With oil below $60/barrel they have a problem:

fitch-report-on-oil-vulnerabilitiesI’m not someone who focuses on macro factors with my investments, but there is a difference between making predictions and recognizing reality as it is. And when a lot of future tax revenue is gone it isn’t exactly a stretch to assume that there will be a lot less money available in the coming years for stuff like public infrastructure: the kind of work Conduril does. It also increases Conduril’s credit risk on its outstanding receivables.

I don’t know if this realization is driving the decline behind Mota-Engil Africa’s share price. I called this company a good comparable to Conduril just two weeks ago because it’s active in the same sector and it is also getting roughly 50% of its revenues from Angola (it does however have a more leveraged balance sheet). When you see that Mota-Engil Africa is down more than 50% since its listing in Amsterdam three weeks ago the recent decline in Conduril’s share price suddenly doesn’t look that bad:

CDU vs MEAFR share price

Despite the sales Conduril is still my biggest position, just not as big as earlier this year.

Disclosure

Author is long Conduril, no position in Mota-Engil Africa